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May 30, 2008 2:36 PMPublication: The East Hampton Press

East Hampton bond rating drops on deficit concerns

May 30, 2008 2:36 PM

The credit analysts Moody’s Investors Service dropped East Hampton Town’s bond rating from one of the company’s highest levels earlier in May, citing concerns about overspending and the growing budget deficit in town.

According to the Moody’s analyst who handled East Hampton’s rating review, the town’s estimated budget deficit of more than $8 million was the primary reason for the rating demotion. The town’s rating went from Aa1, one of the highest ratings the credit service assigns to a municipality, to A2, four rungs down on Moody’s rating ladder.

A2 is a common rating for municipalities and still identifies the town’s bonds as a low risk investment. There are 36 Moody’s bond rating levels, from Aaa to C3. Aa1 is five steps from a perfect Aaa1; A2 is five steps below Aa1 and 11 steps from a perfect rating.

“A2 is the median rating nationwide,” Lisa Cole, executive vice president of Moody’s explained, “but among Long Island towns it’s among the lowest” ratings. Ms. Cole said that Rochester, New York and Nassau County both have A2 designations.

“This change was based almost entirely on the financial deterioration—the negative fund balance and the understanding that it is probably going to remain that way for at least a couple of years,” said Ms. Cole. “We recognize that they are taking steps to turn it around, but Aa1 is one of highest ratings and, based on the way they looked financially, it just wasn’t consistent.”

Supervisor Bill McGintee commented, “Would I like to still be an Aa1? Sure. But am I overly concerned about the A2? No—and there is no reason we should be.”

The Moody’s ratings are used by investors to gauge the level of risk that a municipality will not pay back loans for capital projects. Ms. Cole said that most other towns in the state have a bond rating the same or very close to East Hampton’s A2.

The town’s independent auditors had warned board members at a meeting in February of an anticipated drop in the rating. Moody’s attached a warning to the town’s fiscal rating in 2005 that a “negative outlook” meant the rating was likely to drop at some point. Ms. Cole said that the warning has been removed now because the company does not expect to lower East Hampton’s rating again within the next two years.

Despite the hit to the long-term bond rating, the town’s short-term rating remained steady at the highest level assigned by Moody’s, and the town got a lower interest rate on the rollover of several capital project loans last week than they did last year: The town was granted an interest rate of 1.8 percent on the bond anticipation note; the same notes had carried interest of more than 3 percent last year, according to the town’s financial advisor, Richard Tortora.

Mr. Tortora explained that the lower long term rating might raise interest rates on bonds and bond anticipation notes. The rate would depend on market conditions and could vary based on the day of the sale. He said that a downgrading from Aa1 to A2 could cost the town one-tenth of one percent in terms of interest rates.

Ms. Cole commented, however, that the downgrade “doesn’t mean that the fundamental economic base isn’t there toward a higher rating.”

Countering that bit of good news from Mr. Tortora about the lower rate the town recently obtained were new concerns: Councilman Peter Hammerle said that he and Town Attorney Laura Molinari had found language in the statement the town issued last week to potential bond investors, describing the town’s fiscal situation, that was “not entirely accurate.”

The statement said the town expects to have a budget surplus in 2008—which Mr. Hammerle maintains will certainly not be the case. In fact, he said the town will be lucky to be able to come in on budget for the year, even with the staffing and spending cuts the board and the supervisor have discussed recently. The statement also noted that it had been reviewed by the town attorney’s office yet apparently it had not.

Mr. Hammerle said that Ms. Molinari had ordered the statement changed after discovering the inaccuracies and would be distributing a new statement to the company that gave the town the bond anticipation note, and to Moody’s. Mr. Hammerle said he did not know if the changes made to the statement, including dropping the contention that the town would begin paying down the deficit in 2008, would affect the interest rates the town received on Wednesday, but he said the statement is now a more “accurate reflection of the financial situation.”

Town Supervisor McGintee said he was unaware of what the statement said in reference to the town’s financial status—it was written by the financial advisor, most likely, according to Mr. Hammerle, based on information provided by the town’s budget officer, Ted Hultz.

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